Expanding and Protecting Your Sources of Wealth | AWM Insights #164
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Episode Summary
Capitalizing on your Human Capital is essential. Capturing the three main branches of Human Capital (Physical, Intellectual, and Social Capital) in a comprehensive and tax-efficient manner is the starting point for building wealth.
From there, this acquired needs to be strategically used to work for you. Warren Buffett famously said, “If you don't find a way to make money while you sleep, you will work until you die.”
Establishing a plan to maximize your Human Capital and put it to work in the most effective way for you and your goals is how Multi-Generational Wealth is built, preserved, and expanded.
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Episode Highlights:
0:00 Intro
0:55 Human Capital and the three distinct segments of it.
2:56 Maximizing your Human Capital and the importance of focusing on tax efficiency
4:09 Utilizing your capital to accomplish your goals
5:49 Setting up your portfolio to cover your priorities and expand your wealth
7:25 Syncing your portfolio with your life
9:00 Text us!
+ Read the Transcript
Brandon Averill (00:05): All right, buddy. Welcome back to another AWM Insights. It's Brandon and Justin, and we're going to kick off a new little series here and really outline how we think about wealth in its totality, really how to build a multi-generational wealthy, flourishing family and set yourself up for success.
(00:25): I think anybody that knows us, certainly all the clients listening, you guys know we talk a lot about why does money actually even matter? For us, our viewpoint is is that money's just a tool. It's a tool at the end of the day to provide for your priorities. Those priorities oftentimes do include building basically an infinite loop that generates wealth that's going to last multi-generations. We're going to run through a little bit just the framework, how we look at it, and over the next few weeks, we'll really dig into the pieces and give a little bit more explanation by what we mean.
(01:00): But at the top of this formula, we talk a lot about human capital, as you know. When you think about human capital, I think it's pretty helpful to start to think about it in really three distinct different ways. One is physical capital For our athletes listening, you've certainly capitalized on this. You've taken the physical capital that you've generated, and you go out on the field or the court or the rink, and you're able to generate income from that ability. It's a huge power driver in your overall wealth.
(01:33): Then there's intellectual capital. When you're washed up, you have to come over to the other side of the working world like we are.
Justin Dyer (01:39): Join us.
Brandon Averill (01:39): Yeah, you study up, and you have to use that intellectual capital that gets developed over time. Again, you can start to convert that into income for your family.
(01:50): Then the last piece would be social capital, and I'd argue this is something that everybody really participates in, whether it's us going to networking events, etc. Participating in the venture community is another way of doing it, or even just out meeting with our clients and developing new lead prospects, et cetera, that's another way for you to really create income from your capital.
(02:14): Thinking about those three things, we'll continue to dive deep in another episode on this, but that's really what ends up creating our gross income.
Justin Dyer (02:22): Yeah, and hopefully everyone is thinking about really maximizing those aspects of human capital so you end up getting new reference income, cold hard cash if you want to think about it that way. I think you could also say there's another source of income through more, let's call it, qualitative instead of quantitative aspects. That's probably a whole nother topic, which I'm not going to go down a rabbit hole on. But you use these aspects of your human capital to generate income.
(02:51): Income, unfortunately, is taxed. It's one of those realities we all have to live with, death and taxes. But it's important to highlight that even before we get into an investment conversation because taxes really are the number one destroyer of wealth. Comprehensive, thoughtful tax planning can really maximize returns without even investing a dollar. There's aspects of what we can do around investing that impact the tax equation as well, and we'll get into that one as well. But taxes and proper tax planning are critical.
(03:29): You can even think about, like you said, this infinite loop when you do get to a point where you're investing and harvesting the gains from your human capital and what's left over from gross income. Start investing that, and that generates its own taxable income as well, which there are ways in which you can minimize the tax impact there. But it is this virtuous, virtual, virtuous, excuse me, cycle where you really, really, really need to be thinking about minimizing that tax impact to get to your net income. Then at that point in time, you're playing the cashflow game, right?
Brandon Averill (04:05): Yeah, and I think when we get to that cashflow game, so we've minimize the tax that we're paying, we're maximize the cashflow. Really comes down to pretty simply, as you guys have heard us say before, three different decisions. You can really only use money in three different high-level ways. You can spend it, you can save it, and you can share it. Obviously, everybody knows that we're big fans of sharing. We think that's a big part of creating a nice flourishing family is the giving aspect. But when you share money, you give it away, or you spend money on priorities, which could be very good things, the thing about that is the money is gone. You're not giving it back.
(04:45): So then that third way is save, and that's really the determination of, okay, if I can save this much, how do I start to create a bucket of assets that will then ultimately generate income for us to continue to feed this loop?
(05:01): So once we've made those decisions, and a lot of you know, our benchmark for that saving is hitting that 40% of your gross income, if you're able to do that, you end up producing a pretty good lifestyle and matching up the lifestyle you created with the savings that you have. That really leads to how do we actually generate those returns, right?
Justin Dyer (05:21): Yeah, yeah, and that gets into the investment portfolio, which generally depending on where you are in your career and wealth levels, et cetera, it encompasses public market investments and private market investments. We'll get into those as well. But the whole purpose is to, in a way you can think about it, generate passive income to support your priorities. This is where I think that statement you made at the outset while true throughout this conversation we're having, the rubber hits the road, if you will. Money matters. It's a tool. Why money matters, it's a tool to pay for what's important, and you have this portfolio that's invested to pay for your priorities.
(06:00): Certainly doesn't mean your human capital goes away as a variable. This whole conversation is not just this one linear lifecycle. You can use a part of your assets to continue to reinvest in your human capital, but you shouldn't use all of it. It's the whole idea of diversification.
(06:16): If you think about, we talked about before we just started recording, a founder is a perfect example. Say they had a really successful exit. I don't think I've heard a sophisticated founder certainly take all of that money from an exit and just go start something new. No, they might take a portion of that, and then the rest of it is there to generate that passive income in a very thoughtful, more stable, longterm way for their priorities. That's where this whole cycle comes together and can continue until you really do want to completely live off a passive income-driven portfolio.
Brandon Averill (06:54): I think that's why we talk to you guys so much about your priorities is because if you think about it, you've got those three ways. If you have a real crystal clear view of what your priorities are, what it allows you to do then is to invest more and more of your money and create more and more of this passive income and be able to feed. It's not wrong to want to go buy a chain, for instance, but it is putting yourself through that process, "Well, shoot. I could either spend that money and it's cool, I look good, or B, maybe does that give me some more assets, and now I could go hire the right nutritionist or the right trainer if I'm maximizing my physical capital? Or does it pay for me to take an online course or to learn something from my intellectual capital or social capital? Does it actually allow me to now take a trip up to Silicon Valley and spend time with a bunch of venture managers and learn a lot more outside of my sphere of influence?" So it really is this kind of loop here.
(07:52): It seems, I think oftentimes, like this is a very simple formula, but it really does translate all the way across the board. There's a lot of nuance, there's a lot of strategy, there's a lot of complexity that underlies all of this, but that is really the formula to build wealth.
(08:08): We'd be remiss to not talk about, we could build the most beautiful structure here, the most beautiful formula for multi-generational wealth, but there are risks. So we want to make sure that what we're doing is putting a big bubble around this formula as well. We'll go down the series, and at the end of the series, we'll likely wrap up with identifying some of these risks, death, disability, liability. You own a rental property, for instance, in your personal name, and now you've got a slip and fall and your whole formula is at risk. We want to protect against all those types of things, too.
(08:45): We've hit on a lot this word multi-generational family dynamics. We know this blows up the multi-generational formula more than anything else. So how do we navigate that with our families, raise children that really adopt the values that we have, and respect the wealth that has been generated, and start to develop their own process for physical, intellectual, or social capital?
(09:07): Hopefully, this is a good overview. We hope you join us over the next few weeks as we dig into some of these topics. We'd love to hear from you. Feel free to shoot us a text if you have questions as we dig in. (714) 504-7689 is the phone number. Text me directly. But until next time, own your wealth, make an impact, and always be a pro.